QA DataBank Question 1.10 & 1.11

[zuglubuglu]

The model solutions states that it is not possible to tell on a global basis. However isn't this a possible explanation:

The proportion of premium that B gets is

• zero if EML is lower than £2.75 million
• excess of EML over £2.75 million as a fraction of EML if EML is between £2.75 million and £5.25 million. For example if EML is £5million, B gets (5-2.75)/5 = 9/20th of premium.
• 2.5 million as afraction of EML if EML is above 5.25 million. For exmaple B would get 1/3 of premium if EML is £7.5 million.

 

[zuglubuglu]

QA DataBank Question 1.10 &1.11

Am I right in assuming that the model solutions are not an exhaustive list. In the examples the cover operates first but what about

• a facultative Risk XLoss of £2.2 million of £800,00 on individual claims on net retention after A and B
• a third surplus treaty of 9 lines (same size as with A and B)

 

[Katherine Young]

Not quite Zuglubuglu.

The maximum size risk the company can cede through the program is a risk with EML = £5.25m (and this will be shared between the company, A and B in the ratio 1:10:10).

Since A and B require a fixed retention of £250k, we are looking for solutions that operate before A and B (or concurrently with A and B).

•a facultative Risk XLoss of £2.2 million of £800,00 on individual claims on net retention after A and B

I assume you mean £2.2m XS £800k, to apply before A and B. This would reduce the EML to £5.8m, ie the EML would still be too big to cede through the surplus treaties.

•a third surplus treaty of 9 lines (same size as with A and B

A third surplus treaty would be an option, but it would need to have 10 lines (not 9 lines), so that risks are shared in the ratio 1:10:10:10.

 

[zuglubuglu]

1.10 Is my reasoning (in the earlier post) correct that explains the proportion that B gets correct? Specifically is the maximum EML that can be taken on board limited to 5.25 million?

1.11 Am I right in understanding that the EML is covered only by reinsurer A and B while C, D and E are there to cover extreme cases?

Right now the company can cover up to 5.8million loss when taking into consideration A, B, C and D. Does this mean that the EML can only be up to 5.25million in any case? This is related to my question re 1.1?

A third surplus treaty would be an option, but it would need to have 10 lines (not 9 lines), so that risks are shared in the ratio 1:10:10:10.

If so wouldn't the third surplus treaty be 1:10:10:11 such that we cover 250k while A and B cover 2.5million each and the new reinsurer covers 2.75million?

 

[Katherine Young]

1.10 Is my reasoning (in the earlier post) correct that explains the proportion that B gets correct? Specifically is the maximum EML that can be taken on board limited to 5.25 million?

As I said, the maximum EML is 5.25m. The first two bullets of your first post are correct. The third bullet would also be correct, were it not for the fact it's talking about an EML greater than 5.25m.

1.11 Am I right in understanding that the EML is covered only by reinsurer A and B while C, D and E are there to cover extreme cases?

It depends on the size of the risk, and what you consider to be an extreme event. Consider a risk with EML 750. If a claim occurs of size 660, then A would pay 440 leaving 220 to cede through the XL. Hence, C would be impacted. This scenario would be a large loss to the insured, but not a particularly extreme event in the scheme of things.

Right now the company can cover up to 5.8million loss when taking into consideration A, B, C and D. Does this mean that the EML can only be up to 5.25million in any case? This is related to my question re 1.1?

I'm not sure where you get 5.8m from. The point is that A and B won't accept any risk with EML greater than 5.25m.

wouldn't the third surplus treaty be 1:10:10:11

Correct. My mistake.

 

[zuglubuglu]

Thank you Katherine, this is much clearer now.